Software is Eating the Web3 World
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July 24th, 2022

Is anyone else over the doom and gloom on web3 and VC Twitter these days?

Yes, we’ve entered a market downturn and another crypto winter, but the timing has never been better to invest in what will become the biggest web3 companies of the next decade. Looking back at the last decade, I’m confident in this.

Just over a decade ago, Marc Andreessen famously wrote the piece “Why Software is Eating the World,” and we have watched his thesis accurately play out since then. SaaS took off in the 2010s, experiencing 1300% industry growth from 2014 until its peak in Q4 2021.

BVP Nasdaq Emerging Cloud Index
BVP Nasdaq Emerging Cloud Index

👯  Comparing the onset of the web2 & web3 SaaS eras:

Andreessen believed the SaaS industry would take off because “all of the technology required to transform industries through software finally work[ed] and [could] be widely delivered at global scale.” This was due to a number of factors that reduced the time and cost to launch a software business, including:

  1. Increased accessibility (via broadband and mobile phone)
  2. Improved developer tools
  3. Greater scalability (cloud-based infrastructure)

We are now seeing these same factors - accessibility, dev tools, scalability - begin to form in web3 as we enter a new decade of software eating the web3 world:

  1. Accessibility is improving now that 200M+ crypto wallets are being used around the world (a rough estimate derived from Coinbase, MetaMask, and Blockchain.com’s unique users) and significant funding has poured into web3 user onboarding solutions. Examples of these onboarding solutions and improvements include learn-to-earn platforms (e.g. Rabbithole, Layer3), human readability (e.g. SolFinder, ENS Domains), auth infrastructure (e.g. Web3Auth), and simplified on and off-ramps (e.g. MoonPay, Wyre) that will help usher in the next 200M+ people to web3.
  2. Smart contracts’ unique composability makes all software created on the blockchain open source and easy for developers to reuse and build upon. This rapidly reduces the time and cost to launch a new web3 project.
  3. Networks of nodes are already established to make scaling of decentralized storage, servers, and computing power possible in web3 (e.g. Arweave, Alchemy). This offers a more scalable, distributed architecture than exists in web2. (Yes, L1 scalability is still a challenge, but companies like our portfolio company Analog are helping to solve for it.)

🚪  Maturation of web2 SaaS is opening the door for massive growth of web3 SaaS:

After a decade of explosive growth in web2 SaaS, SaaS funding slowed to a record 15% low of total global venture funding in 2021, down from a high of ~23% in 2014, signaling market maturation. Over this time, strong SaaS industry performance led to an influx of new entrants, significant advancements in SaaS tooling, and playbooks for launching new SaaS companies. As the industry has matured and grown crowded, it has hit an inflection point where it is now easier than ever to launch a new SaaS company but harder to meaningfully scale it, as Packy McCormick recently pointed out.

Another sign that web2 SaaS has become a crowded and mature market is that its growth is now primarily stemming from the unbundling and rebundling of existing solutions. We’re seeing aggressive verticalization of existing horizontal products, as well as rebundling and centralization of the existing tech stack because too many SaaS tools are being used today. What I’m saying is the biggest opportunities in web2 SaaS have mostly been tackled already. New entrants are limited to solving marginal improvements rather than the industry-defining challenges that will be solved by the next generation of decacorns.

As web2 SaaS’s golden era now comes to an end, web3 SaaS provides a massive new white space opportunity. Web3 has grown to a massive $1T sector, yet is still like the wild west with many challenges yet to be solved. Broadly speaking, web3 lacks sufficient tooling to meet its unique technical and cultural needs (more on this in my next piece).

Founders building web3 SaaS companies right now have an almost unfair advantage. They can develop competitive moats as first-movers in the space, recreate products and business models that have already been proven out in web2 but that will serve a new and different set of needs in web3, and attract funds from both web3 investors and traditional web2 investors in search of new opportunities with higher return potential. For investors, web3 SaaS presents an uncapped opportunity to back the next era of category leaders.

🚀  The golden era of web3 SaaS:

Despite the current economic downturn, if we believe that web3 will continue to exist in the future - which seems extremely likely given the significant amount of capital and talent that it has amassed to date - then right now is an incredible time to be investing in web3 tooling. These foundational web3 tools will:

  1. propel the most promising existing projects, dapps, and communities to new levels of growth
  2. lay the foundation for the next wave of even stronger and more transformative projects and companies to be built
  3. set the stage for mass adoption when the economy improves and a new crypto summer emerges

Some of the tooling needed for web3 to enter its next growth cycle are already becoming clear, such as solutions for L1 scaling and security, cross-chain interoperability, and improved UX/UI and human readability of data. Arguably, however, the most de-risked area of opportunity lies in web3 SaaS, given its resemblance to the massive web2 SaaS market that has generally been lucrative, predictable, and stable over the last decade. With this in mind, I’ll be spending time over this crypto winter analyzing opportunities in web3 SaaS, starting with this question…

🤔  What popular web2 SaaS products need to be rebuilt to deliver on the distinct technical and cultural needs of web3?

Some initial thoughts:

📈  Data Analytics

🤝  CRMs

✉️  Communication & messaging

I’ll be diving into each of these emerging web3 SaaS categories in my next piece, so stay tuned for Pt. 2 soon!

Thanks for reading. I’m a pre-seed & seed stage investor at the Basecamp Fund at Alumni Ventures. If you’re a founder building any of these solutions for web3, let’s chat! @kay_phillips_

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